Federal Fiscal Court judgement: Cash-basis VAT and voluntary bookkeeping (section 20 of the VAT Act)

The scheme and purpose of cash-basis taxation under section 20 sentence 1 no. 3 of the VAT Act

In principle, VAT is governed by “accrual-basis taxation” [Soll-Besteuerung]: the tax arises at the end of the advance-return period [Voranmeldungszeitraum] in which the supply was made (section 13(1) no. 1 (a) of the VAT Act). It is computed on the basis of the consideration agreed (section 16(1) sentence 1 of the VAT Act). Section 20 of the VAT Act permits exceptions on application: under “cash-basis taxation”, the tax arises only at the end of the advance-return period in which the consideration is received (section 13(1) no. 1 (b) of the VAT Act). The catalogue today comprises four sets of circumstances: the total turnover of the previous year (section 20 sentence 1 no. 1 of the VAT Act, EUR 800,000 since the Growth Opportunities Act [Wachstumschancengesetz] of 2024), exemption from the obligation to keep books under section 148 of the Fiscal Code [Abgabenordnung–AO] (no. 2), supplies from a liberal profession within the meaning of section 18(1) no. 1 of the Income Tax Act (no. 3) and – since the Annual Tax Act 2022 [Jahressteuergesetz 2022–JStG 2022], with effect from 1 January 2023 – legal persons governed by public law (no. 4).

The legislative history of no. 3 explains its shape. Under the Reich Fiscal Code [Reichsabgabenordnung–RAO], members of the liberal professions who were subject to an obligation to keep books were released from that obligation again by section 161(2) of the Reich Fiscal Code in conjunction with section 142(1) no. 3 of the Income Tax Guidelines 1967 [Einkommensteuer-Richtlinien–EStR], and could therefore opt for cash-basis taxation by way of the predecessor of what is today section 20 sentence 1 no. 2 of the VAT Act. With the Fiscal Code 1977, the obligation of the liberal professions to keep books for tax purposes fell away – and with it the possibility of exemption under section 148 of the Fiscal Code. At the request of the Finance Committee (Bundestag official record [BT-Drucks] 7/5456, p. 28), the legislature thereupon created what is now no. 3 (Art. 17 no. 9 (b) of the Introductory Act to the Fiscal Code [Einführungsgesetz zur Abgabenordnung–EGAO]). The express intention was to preserve “the existing scope of taxation on the basis of consideration received” (Bundestag official record 7/5458, p. 13). On the fifth chamber’s understanding, the purpose of the provision is therefore not the removal of pre-financing disadvantages – precisely this point was in dispute in the appeal proceedings – but the alignment of the VAT and income tax records: a person who determines his profit under section 4(3) of the Income Tax Act in conjunction with section 11 of the Income Tax Act, because he is not obliged to keep books under sections 140 and 141 of the Fiscal Code, should not have to build up a receivables accounting system for VAT purposes alone.

The basis in Union law is Art. 66(1)(b) of the VAT Directive [Mehrwertsteuersystemrichtlinie–MwStSystRL], which, by way of derogation from Art. 63 of the VAT Directive, permits the tax to become chargeable, for certain supplies or categories of taxable person, no later than on receipt of the consideration. Member States must observe the principle of fiscal neutrality even when exercising such authorisations (Court of Justice of the European Union judgement of 17 Jul 2008, file ref. C-132/06, Commission v Italy, para. 39; most recently Court of Justice judgement of 5 Mar 2026, file ref. C-409/24 to C-411/24, J-GmbH, para. 51). The principle of neutrality requires that economic operators making supplies of the same kind not be treated differently in the collection of the tax either – irrespective of whether section 20 of the VAT Act is classified as a substantive rule on when the tax arises or as a matter of the collection procedure.

The case law of the fifth chamber has narrowed the scope of application in two steps and on shifting grounds: a tax advisory limited company [Steuerberatungs-GmbH] is not a member of a liberal profession and falls outside the provision on its wording alone; at the time, the chamber expressly denied any infringement of neutrality as to legal form (Federal Fiscal Court judgement of 22 Jul 1999, file ref. V R 51/98, Federal Tax Gazette II 1999, p. 630, at II.). Eleven years later, the same argument was reversed: in order to preserve neutrality, the cross-reference to section 18(1) no. 1 of the Income Tax Act was to be read merely as a description of the supplies by their nature, with the result that taxpayers subject to an obligation to keep books are denied cash-basis taxation under no. 3 (Federal Fiscal Court judgement of 22 Jul 2010, file ref. V R 4/09, Federal Tax Gazette II 2013, p. 590, para. 19; parallel decision of 22 Jul 2010, file ref. V R 36/08). The Federal Constitutional Court [Bundesverfassungsgericht–BVerfG] declined to accept for decision a constitutional complaint directed against the case with the file ref. V R 4/09 (Federal Constitutional Court order of 20 Mar 2013, file ref. 1 BvR 3063/10). Only thereafter did the tax administration draw the conclusion that the voluntary nature of the bookkeeping is immaterial (Federal Ministry of Finance [Bundesministerium der Finanzen–BMF] Circular of 31 Jul 2013, Federal Tax Gazette I 2013, p. 964; section 20.1(1) sentences 6 and 7 of the VAT Application Decree [Umsatzsteuer-Anwendungserlass–UStAE]).

In procedural terms, the authorisation is a discretionary administrative act and, on the chamber’s case law to date, not a continuing administrative act (Federal Fiscal Court decision of 23 Dec 2021, file ref. V B 22/21 (stay of proceedings), paras. 14 and following). Any revocation is governed by section 130 of the Fiscal Code. What matters in practice is the consequent choice of track in interim legal protection: in the case in dispute, the application for suspension of enforcement was inadmissible for the very reason that, for the periods from 2021 onwards, what was at stake was no longer the revocation but the initial grant of the authorisation.

Voluntary bookkeeping and the principle of neutrality

The claimant was a partnership of lawyers, auditors and tax advisers which had determined its profit voluntarily by the accounting method [Betriebsvermögensvergleich] since 2006 and whose total turnover consistently exceeded the threshold of section 20 sentence 1 no. 1 of the VAT Act. After the tax office had revoked the cash-basis taxation – which it had initially not objected to – with effect from 2019, the claimant applied for the authorisation for all tax periods from 1 January 2021. The direct action [Sprungklage] (section 45(1) sentence 1 of the Rules of the Fiscal Courts [Finanzgerichtsordnung–FGO]) against the refusal was unsuccessful (Baden-Württemberg Fiscal Court judgement of 9 Jul 2024, file ref. 9 K 86/24). The Federal Fiscal Court dismissed the appeal on points of law. The claimant had objected in essence that the observations in V R 4/09 on voluntary bookkeeping had not been part of the ratio; the headnote (“adherence to the judgement [...] V R 4/09”) answers precisely that point. The parallel action against the revocation notice (9 K 1220/22) remains stayed.

What carries the decision is the principle of neutrality (paras. 8 and following): supplies made in the course of tax advisory activity may not – where books are kept – be treated differently according to whether they are made by a sole practice, a professional partnership [Sozietät] or a tax advisory limited company. Since the limited company falls outside section 20 sentence 1 no. 3 of the VAT Act for reasons of wording and legislative history, the decisive criterion must be a different one. The fifth chamber finds it in the keeping of books, the abolition of which was historically the origin for the provision. Whether books are kept under compulsion or voluntarily then makes no further difference. Only in this way are the supplies treated equally in a manner neutral as to legal form.

The real innovation lies in the refinement of the test (para. 15). The authorisation requires that the trader is neither under a statutory obligation to keep books and prepare regular financial statements nor does so voluntarily for tax purposes. The concept of “receivables accounting” [Forderungsbuchhaltung] used by the Federal Constitutional Court is thereby replaced by a twofold criterion of bookkeeping and financial statements: the recording of customer receivables in the books by means of an open-item accounting [OPOS] system precludes neither section 4(3) of the Income Tax Act nor section 20 sentence 1 no. 3 of the VAT Act. There is accordingly no enforcement deficit on the part of the administration – as complained of by the claimant.

The chamber rejects the claimant’s remaining objections one by one: no argument a contrario for no. 3 can be drawn from section 20 sentence 1 no. 4 of the VAT Act, which expressly requires of legal persons governed by public law that they do not keep books voluntarily; that provision merely takes account of the particularities of cameralistic accounting [kamerale Buchführung] (Bundestag official record 20/4729, pp. 150 and 151). Nor does the deferral of the input VAT deduction for the recipient of the supply introduced by the Annual Tax Act 2024 [Jahressteuergesetz 2024–JStG 2024] (section 15(1) sentence 1 no. 1 sentence 2 and section 27(41) of the VAT Act) justify an extensive interpretation. And the taxpayer cannot rely on a more generous administrative practice: Art. 3(1) of the Basic Law [Grundgesetz–GG] confers no entitlement to the extension of an unlawful administrative practice (Federal Fiscal Court judgement of 20 Jun 1989, file ref. VIII R 82/86, Federal Tax Gazette II 1989, p. 836; decision of 18 Jun 2014, file ref. III B 19/14).

At the same time, the chamber points to the temporal interlocking: the election in favour of the net asset comparison is validly exercised only upon the opening balance sheet, an established bookkeeping system and financial statements (Federal Fiscal Court judgement of 19 Mar 2009, file ref. IV R 57/07, Federal Tax Gazette II 2009, p. 659; judgement of 21 Jul 2009, file ref. X R 46/08) and may still be exercised after the end of the profit determination period (Federal Fiscal Court judgement of 20 Mar 2013, file ref. X R 15/11), whereas VAT arises on an ongoing basis. Whether the tax office may for that reason make the authorisation subject to an ancillary condition [Auflage] is expressly left open by the chamber.

Conclusions for professional practices and structuring practice

For members of the liberal professions who use accrual accounting – in particular larger professional partnerships [Sozietäten] and registered partnerships [Partnerschaften] – cash-basis taxation under section 20 sentence 1 no. 3 of the VAT Act is barred for as long as the books form the basis of regular financial statements. Anyone wishing to preserve the cash-flow advantage must either stay below the turnover threshold of section 20 sentence 1 no. 1 of the VAT Act or leave matters at the cash-basis profit computation [Einnahmen-Überschuss-Rechnung] under section 4(3) of the Income Tax Act. The decision on the method of profit determination is thus at the same time a VAT decision, one which should be taken and documented before the beginning of the tax period concerned, particularly since the election to use accrual accounting can be exercised after the event and the authorisation is then called into question retroactively (section 130 of the Fiscal Code).

The chamber’s refinement brings relief: records and books containing all the particulars required for accrual-basis taxation – open-item lists, for example – are unobjectionable for as long as they do not become the basis of regular financial statements within the meaning of section 4(1) of the Income Tax Act. Professional practices with a developed receivables accounting function do not therefore lose cash-basis taxation merely because they record their outstanding receivables in the books. Where an application is refused, the correct remedy in interim legal protection is the interim order under section 114 of the Rules of the Fiscal Courts, and not suspension of enforcement (section 69 of the Rules of the Fiscal Courts).

Beyond the individual case, cash-basis taxation is losing its attractiveness: under the new rule introduced by the Annual Tax Act 2024, for invoices issued after 31 December 2027 the recipient of the supply may deduct input VAT on supplies from a person taxed on the cash basis only upon payment (section 15(1) sentence 1 no. 1 sentence 2 of the VAT Act in conjunction with the application provision of section 27(41) of the VAT Act), accompanied by the new mandatory invoice particular “Versteuerung nach vereinnahmten Entgelten” (taxation on the basis of consideration received) (section 14(4) sentence 1 no. 6a of the VAT Act). For professional practices with business clients, cash-basis taxation is therefore no longer an unmitigated advantage but a point that has to be explained to clients. The balance between voluntary accrual accounting – for reasons of partner accounting or bank financing, for example – and the VAT cash-flow advantage should accordingly be struck afresh.